Tags: tesla | motors | elon musk | investors | car

Tesla Motors Poised to Stall After a Long Dead-End Street

Tesla Motors Poised to Stall After a Long Dead-End Street

By    |   Friday, 06 April 2018 07:17 AM

At the height of the stock market selloff back in 2008, the government started throwing everything (including the kitchen sink) to keep markets afloat.

Sure, we remember TARP and the bailouts, but there were other measures as well. For instance, the SEC placed a ban on short-selling financial companies on September 19, 2008.

Remember, short-selling is when you borrow shares of a stock, sell it at market, and try to profit should the price go down.

It’s a strategy that can be costly if you’re wrong (you’re better buying long-dated put options on a stock you think will fall).

If shares rise, you’re in the red. If a company pays a dividend, you’re on the hook to pay it as borrower. And there’s a cost to borrowing shares as well. But when the stars align, it can make huge profits quickly.

One of the reasons for the government’s decision was the fact that many financial CEOs were complaining that their shares were being sold short. Considering most of the big-name banks lost 70-80 percent of their peak value during that time, it’s no surprise they’d want to pass the buck on speculators. But all the speculators were doing with their short bet was sending a signal that the shares hadn’t sold off enough yet.

Sure enough, the worst month for financials came after the short-sale ban expired on October 8th, 2008. And the overall market wouldn’t hit a low until March 2009.

There are a few key takeaways here, but to me one of the most interesting is the notion that, whenever you hear a company CEO complain about short-sellers, it’s a signal that there’s more trouble ahead.

Last week, Tesla Motors (TSLA) CEO Elon Musk urged workers to ramp up production on the electric vehicle company’s Model 3 roadster. His rationale?  A need to “prove the haters wrong.” In this case, the haters were those betting that shares of the company would continue to decline.

It’s not the first time that Musk has called out short-sellers at one of his companies. On Twitter last year, he bragged about how shares had performed following a big rally, questioning the intelligence of short-sellers.

But Tesla’s had a terrible run rate. They’re producing around 200 cars a day, against expectations of numbers closer to 1,000. Even Musk’s urge to his employees was to boost production to 300 cars per day. The company is losing money at such a rapid rate that a 50 percent rise in production won’t make the cut for cash flow, much less profitability.

Two weeks ago, a Tesla car testing out a self-driving module stuck and killed a pedestrian. That program has been temporarily halted. And, the company just recalled its Model S series—essentially a third of the cars it has sold so far.

But, like Apple (AAPL) enthusiasts in the Steve Jobs era, Tesla has its acolytes. They’ve sent shares of Tesla to a total valuation over $50 billion at their peak, far higher than that of Ford Motors (F), which produces more cars, and also does this crazy thing in the business world where it makes a profit on each one it sells.

Tesla has no earnings, a fraction of expected sales, and a crippling debt load that’s going to start to come due as early as November. It’s no wonder shares also received a credit downgrade from Moody’s recently.

That’s why Tesla’s share price has dropped. And why Tesla’s bonds have slid to a sizeable discount to par value. If things don’t turn around—and meaningfully so—then investors won’t want to go long. A few bond buyers may hope that the share reach par, but without the cash flows from actually producing enough cars, even bondholders at today’s prices could get burned.

The fact of the matter is, Musk is a distracted CEO. He’s busy running other companies like Solar City and SpaceX. He’s a jack of all trades … but a master of none. A good CEO puts their company first — and only one company at a time.

Worse, Musk seems more interested in being aspirational to others rather than actually producing value. And his companies rely so heavily on government subsidies (solar credits for SolarCity, electric vehicle rebates for Tesla, and so on), that any change in government policies can change that perception at any time.

At the end of the day, Musk is less of a visionary in the mold of the late Steve Jobs and closer to a carnival barker.

Could things turn around? Sure, if Musk focuses on the company, or steps back and hires a CEO who’s willing to make that commitment. And the company has to actually deliver.

But time is running out, and the credit markets is far from forgiving. If investors don’t want Tesla’s bonds, the other option are other loans, or selling more shares of stock, which will further impact the share price.

Facts eventually edge out Mr. Market’s feelings. It may take time, and it may be frustrating to wait on the side of the facts. But they will win out in the end.

The water is running out for Tesla to get much-needed funding. We’re about to find out that the emperor Musk has no clothes. That’s probably why he’s attacking short-sellers again. They see the truth, and they’re willing to put their money into a potentially costly trade to be proved right.

I wouldn’t be surprised to see this operation go belly-up before the end of the year, possibly as soon as the summer or as late as November when $230 million in bond come due.

Typically, when fad stocks die, they stay down for a long time. In this case, it could mean bankruptcy.

If so, then Musk’s April Fool’s tweet announcing the company’s bankruptcy will be no fool after all.

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.

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Typically, when fad stocks die, they stay down for a long time. In this case, it could mean bankruptcy. If so, then Musk’s April Fool’s tweet announcing the company’s bankruptcy will be no fool after all.
tesla, motors, elon musk, investors, car
Friday, 06 April 2018 07:17 AM
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